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GBP572m
The benefits of the three-pronged growth strategy are reflected in Avon Rubber’s H121 performance, which delivered strong overall growth in revenues and adjusted group profitability driven by a strong initial contribution from Team Wendy. The outlook for FY21 is maintained by management, which expects to meet market consensus expectations for adjusted PBT with the anticipated second-half weighting of revenues, despite the adverse impact of FX on costs. Strong order intake and backlog underpin medium-term prospects for further growth. The FY22 P/E of 23.1x represents a c 60% premium to UK defence peers, reflecting the strong growth expectations.
Written by
Avon Rubber |
Protection is the name of the game |
H121 results |
Aerospace & defence |
27 May 2021 |
Share price performance
Business description
Next events
Analyst
Avon Rubber is a research client of Edison Investment Research Limited |
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The benefits of the three-pronged growth strategy are reflected in Avon Rubber’s H121 performance, which delivered strong overall growth in revenues and adjusted group profitability driven by a strong initial contribution from Team Wendy. The outlook for FY21 is maintained by management, which expects to meet market consensus expectations for adjusted PBT with the anticipated second-half weighting of revenues, despite the adverse impact of FX on costs. Strong order intake and backlog underpin medium-term prospects for further growth. The FY22 P/E of 23.1x represents a c 60% premium to UK defence peers, reflecting the strong growth expectations.
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/19 |
162.0 |
28.3 |
84.9 |
26.6 |
49.2 |
0.6 |
09/20 |
213.6 |
36.0 |
96.2 |
34.5 |
43.4 |
0.8 |
09/21e |
284.9 |
48.1 |
125.6 |
44.9 |
33.3 |
1.1 |
09/22e |
362.0 |
69.4 |
181.1 |
53.9 |
23.1 |
1.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Positive H121 momentum
Revenues grew by 41.0% to $122.0m (H120: $86.5m), adjusted EBITDA by 33.1% to $24.1m (H120: $18.1m) and adjusted operating profit by 25.0% to $17.5m (H120: $14.0m). That performance includes a five-month contribution from Team Wendy, acquired on 2 November 2020, of $20.5m to revenues, $6.6m to adjusted EBITDA at a margin of 32.2% and $6.1m to adjusted operating profit. Excluding Team Wendy, revenues grew 30.5%, with adjusted EBITDA $0.6m lower at $17.5m and adjusted operating profit falling to $11.4m. Order intake was stronger with a 45.6% increase to $167.9m (H120: $114.6m), or 30.5% excluding the initial $18.4m contribution from Team Wendy. The book to bill ratio of 1.4x leaves the order backlog at $156.6m (H120: $135.2m). Following the acquisition of Team Wendy for $135.2m, H121 adjusted net debt excluding lease liabilities was $12.9m compared to net cash of $147.7m at the start of the financial year. The interim dividend was increased by 30% in line with the company’s stated policy.
The future is Avon Protection
With the increased focus on critical personal protection products primarily in defence and security markets, the company expects to formally change its name to Avon Protection in H221. Management remains confident of achieving the full year outlook, with H221 trading to date in line with expectations and supported by the strong order backlog. The order book provides visibility for FY22 and beyond with investment in technology and the product offering underpinning future growth.
Valuation: Premium reflects growth and cash flow
The share price has retreated from the highs of 2020 as the delays to the ballistic protection contracts reminded the market of potential risks to the growth trajectory. While trading at a substantial premium to UK defence peers, EPS, dividend and cash flow growth are well above average.
H121 results deliver growth
H121 is the first reported period following the transformation of the company into a focused defence and security group, with operations centred on Avon Protection and the newly acquired Team Wendy. It is also the first time the company has reported in US dollars, reflecting the geographic origin of the bulk of group revenues. Despite the pandemic and the adverse FX impact (appreciation of sterling versus US$) that inflated the UK cost base, the three-pronged strategy of core growth, selective product development and value-enhancing acquisitions has delivered strong overall progress despite the disruption to new ballistic protection contracts announced in December 2020.
Exhibit 1: H121 results highlights
$m |
H120 |
H121 |
% change |
Orders received |
114.6 |
167.9 |
46.50% |
Closing order book |
135.2 |
156.6 |
15.80% |
Revenue |
86.5 |
122.0 |
41.0% |
Adjusted EBITDA |
18.1 |
24.1 |
33.1% |
Adjusted operating profit |
14.0 |
17.5 |
25.0% |
Adjusted profit before tax |
13.0 |
16.0 |
23.1% |
Adjusted basic EPS (US cents) |
32.1 |
41.1 |
28.0% |
Interim DPS (US cents) |
11.0 |
14.3 |
30.0% |
Adjusted net debt (excluding leases) |
65.6 |
12.9 |
-80.3% |
Lease liabilities |
25.9 |
31.2 |
20.5% |
Source: Avon Rubber
Order intake was stronger with a 45.6% increase to $167.9m (H120: $114.6m), or 30.5% excluding the initial $18.4m contribution from Team Wendy. The book to bill ratio of 1.4x leaves the order backlog at $156.6m (H120: $135.2m).
Revenues grew by 41.0% to $122.0m (H120: $86.5m), adjusted EBITDA by 33.1% to $24.1m (H120: $18.1m, margin 19.7%) and adjusted operating profit by 25.0% to $17.5m (H120: $14.0m). That performance includes a five-month contribution from Team Wendy, acquired on 2 November 2020, of $20.5m to revenues, $6.6m to adjusted EBITDA at a margin of 32.2% and $6.1m to adjusted operating profit. Excluding Team Wendy, ongoing Avon Protection revenues grew 17.6% with adjusted EBITDA $0.6m lower at $17.5m and adjusted operating profit falling to $11.4m. The profit declines largely reflected the previously announced delays to new body armour and helmet contracts, as well as continued investment to resolve product-specific issues. Primarily, that involved increasing the energy absorption of backing materials and upgrading the ceramic plates. Management appears confident that these have been addressed and new approval processes are underway.
Exhibit 2: Avon Rubber half year revenue analysis
$m |
H120 |
H121 |
% change |
||||||
Respiratory |
Ballistic |
Total |
Respiratory |
Ballistic |
Total |
Respiratory |
Ballistic |
Total |
|
Military |
46.8 |
16.7 |
63.5 |
60.6 |
13.7 |
74.3 |
29.5% |
(18.0)% |
17.0% |
First Responder |
22.2 |
0.8 |
23.0 |
24.7 |
2.7 |
27.4 |
11.3% |
237.5% |
19.1% |
Avon Protection |
69.0 |
17.5 |
86.5 |
85.3 |
16.4 |
101.7 |
23.6% |
(6.3)% |
17.6% |
Team Wendy |
20.5 |
20.5 |
|||||||
Eliminations |
(0.2) |
(0.2) |
|||||||
Group total |
69.0 |
17.5 |
86.5 |
85.3 |
36.7 |
122.0 |
23.6% |
109.7% |
41.0% |
Source: Avon Rubber
Respiratory product revenues grew 23.6% to $85.3m, comprised of 29.5% growth in Military to $60.6m and 11.3% growth for First Responders to $11.7m. The performance of the ongoing activities was held back by delays in Ballistic products which adversely affected H121 Military revenues and profits but should unwind as contracts progress and volumes climb in H221. Ballistic product sales for Military customers fell 18.0% to $13.7m despite an extra quarter of consolidation. However, Ballistic products sales to First Responders performed well with revenues of $2.7m (H120: $0.8m).
Order intake was stronger with a 45.6% increase to $167.9m (H120: $114.6m), or 30.5% excluding the initial $18.4m contribution from Team Wendy. The book to bill ratio of 1.4x leaves the order backlog at $156.6m (H120: $135.2m).
Adjusted PBT tax rose 23.1% to $16.0m and adjusted EPS of 41.1 US cents were up 28.0%.
Following the acquisition of Team Wendy for $135.2m, H121 adjusted net debt excluding lease liabilities was $12.9m compared to net cash of $147.7m at the start of the financial year. H121 cash outflows also included an inventory build of c $10m to provide strategic buffer stocks against potential supply chain disruptions as well as preparing for H221 sales increases. In addition, $7.6m of cash costs against the divestment of the dairy business were incurred.
The interim dividend of US14.3 cents per share represents a 30.0% increase on the H120 payment of US 11.0 cents, in line with the company’s declared policy. Assuming the same increase for the full year, the FY21 dividend yield should be around 1.0% (at today’s exchange rate).
FY21 outlook
Around half of the order backlog at H121 of $157m is for delivery in H221, which means around $80m of additional revenues need to be booked and delivered to meet our FY21 revenue estimate. Around half of the required revenues should come from run and repeat orders for First Responder products and Team Wendy helmet systems, with the c $40m balance to come from Military. Management indicates that the level of required in year Military book and deliver orders is typical for the stage of the year and points to numerous opportunities for new and follow-on orders spread around the globe. These include additional orders for the DOD for M50 and M53A1 mask systems, a number of new countries that are expected to join the NATO contract as well as further orders from existing customers.
Exhibit 3: Avon Rubber revisions to earnings estimates
Year to September ($m) |
2021e |
2022e |
||||
|
Prior |
New |
% change |
Prior |
New |
% change |
Avon Protection |
242.9 |
242.9 |
0.0% |
314.8 |
314.8 |
0.0% |
Team Wendy |
42.1 |
42.1 |
0.0% |
47.3 |
47.3 |
|
Total Sales |
284.9 |
284.9 |
0.0% |
362.0 |
362.0 |
0.0% |
|
|
|
|
|
|
|
EBITDA |
66.3 |
62.6 |
-5.6% |
88.2 |
88.2 |
0.0% |
|
|
|
|
|
|
|
Avon Protection |
40.4 |
40.4 |
0.0% |
61.8 |
61.8 |
0.0% |
Team Wendy |
10.5 |
10.5 |
|
11.8 |
11.8 |
|
Adjusted operating profit |
51.0 |
51.0 |
0.0% |
73.6 |
73.6 |
0.0% |
|
|
|
|
|
|
|
Adjusted PBT |
48.1 |
48.1 |
0.0% |
69.4 |
69.4 |
0.0% |
|
|
|
|
|
|
|
EPS - adjusted fully diluted continuing (p) |
125.6 |
125.6 |
0.0% |
181.1 |
181.1 |
0.0% |
DPS (p) |
44.9 |
44.9 |
0.0% |
53.9 |
53.9 |
0.0% |
Net debt/(cash) |
(11.5) |
2.5 |
n.m. |
(38.6) |
(9.7) |
-74.9% |
Source: Edison Investment Research
The underlying EBITDA performance has been affected by the inflationary impact of a stronger sterling on the UK cost base as well as the uneven weighting of overhead recovery between the first and second halves due to the anticipated higher H221 revenue. For the whole of FY21, management expects the EBITDA margin to be up to 100bp lower than the 22.9% achieved in FY20. However, due to delays to revenue ramp-up of the delayed ballistic contracts, amortisation is lower than previously expected so adjusted operating profit remains unchanged. D&A in FY22 remains as previously forecast as the affected contracts should ramp up to anticipated levels.
We do forecast a slightly lower level of year-end adjusted net cash, although management still expects cash conversion to recover from the 58.5% seen in H121 to 90% for the full year, aided by some unwind of the inventory build as deliveries are fulfilled.
With low net debt and the $200m revolving credit facility in place, Avon is well positioned for further investment to support and accelerate future growth including acquisitions.
On the management front, CFO Nick Keveth has informed the board of his wish to retire for personal reasons before March 2022. He will participate in the transition to his successor, with the search for a new external candidate initiated.
Exhibit 4: Financial summary
$m |
2019 |
2020 |
2021e |
2022e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
162.0 |
213.6 |
284.9 |
362.0 |
Cost of Sales |
(100.3) |
(127.8) |
(174.4) |
(221.6) |
||
Gross Profit |
61.7 |
85.8 |
110.5 |
140.4 |
||
EBITDA |
|
|
36.2 |
52.3 |
63.2 |
88.2 |
Operating Profit (before amort. and except.) |
|
|
33.0 |
42.5 |
55.3 |
79.2 |
Intangible Amortisation |
(4.2) |
(4.0) |
(4.3) |
(5.5) |
||
Operating profit (company definition) |
28.8 |
38.5 |
51.0 |
73.6 |
||
Exceptionals |
(17.2) |
(35.3) |
(16.6) |
(8.9) |
||
Other |
(0.6) |
(0.1) |
(1.3) |
(1.3) |
||
Operating Profit |
11.0 |
3.1 |
33.0 |
63.4 |
||
Net Interest |
0.1 |
(2.4) |
(1.5) |
(2.9) |
||
Profit Before Tax (norm) |
|
|
28.3 |
36.0 |
48.1 |
69.4 |
Profit Before Tax (FRS 3) |
|
|
11.1 |
0.6 |
31.6 |
60.5 |
Tax |
1.9 |
1.4 |
(6.0) |
(11.5) |
||
Profit After Tax (norm) |
26.1 |
29.9 |
39.0 |
56.2 |
||
Profit After Tax (FRS 3) |
13.0 |
2.0 |
20.1 |
38.4 |
||
Average Number of Shares Outstanding (m) |
30.5 |
30.6 |
30.6 |
30.6 |
||
EPS - normalised (US cents) |
|
|
85.6 |
97.6 |
127.3 |
183.6 |
EPS - normalised & fully diluted (US cents) |
|
|
84.9 |
96.2 |
125.6 |
181.1 |
EPS - (IFRS) (US cents) |
|
|
42.7 |
6.7 |
83.5 |
160.0 |
Dividend per share (US cents) |
26.6 |
34.5 |
44.9 |
53.9 |
||
Gross Margin (%) |
38.1 |
40.2 |
38.8 |
38.8 |
||
EBITDA Margin (%) |
22.4 |
24.5 |
22.2 |
24.4 |
||
Operating Margin (before GW and except.) (%) |
20.4 |
19.9 |
19.4 |
21.9 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
81.2 |
155.3 |
291.8 |
309.7 |
Intangible Assets |
43.5 |
89.4 |
186.4 |
195.2 |
||
Tangible Assets |
26.4 |
38.9 |
69.4 |
76.0 |
||
Right of Use Asset |
11.3 |
27.1 |
36.0 |
38.5 |
||
Investments |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
147.1 |
299.3 |
167.3 |
177.9 |
Stocks |
25.5 |
36.3 |
51.3 |
56.5 |
||
Debtors |
43.6 |
46.0 |
62.7 |
74.5 |
||
Cash |
59.6 |
187.3 |
23.7 |
17.3 |
||
Other |
18.4 |
29.7 |
29.7 |
29.7 |
||
Current Liabilities |
|
|
(43.6) |
(98.2) |
(97.4) |
(97.5) |
Creditors |
(43.5) |
(58.7) |
(71.2) |
(89.9) |
||
Short term borrowings |
(0.1) |
(39.5) |
(26.2) |
(7.6) |
||
Long Term Liabilities |
|
|
(92.0) |
(126.9) |
(130.5) |
(127.6) |
Long term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
Lease Liabilities |
(15.9) |
(29.0) |
(32.9) |
(30.3) |
||
Other long term liabilities |
(76.1) |
(97.8) |
(97.6) |
(97.3) |
||
Net Assets |
|
|
92.6 |
229.5 |
231.3 |
262.5 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
8.8 |
(3.4) |
33.8 |
83.9 |
Net Interest |
0.0 |
(2.4) |
(1.5) |
(2.9) |
||
Tax |
1.9 |
1.4 |
(6.0) |
(11.5) |
||
Capex |
(7.3) |
(19.9) |
(29.5) |
(32.3) |
||
Acquisitions/disposals |
0.0 |
118.8 |
(134.4) |
(9.2) |
||
Financing |
(1.7) |
0.0 |
(1.3) |
(1.3) |
||
Dividends |
(6.9) |
(8.9) |
(11.6) |
(14.7) |
||
Other |
7.4 |
0.8 |
0.0 |
0.0 |
||
Net Cash Flow |
2.3 |
86.3 |
(150.4) |
12.2 |
||
Opening net debt/(cash) |
|
|
(57.3) |
(61.5) |
(147.7) |
2.5 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
1.9 |
0.0 |
0.2 |
0.0 |
||
Closing net debt/(cash) |
|
|
(61.5) |
(147.7) |
2.5 |
(9.7) |
Total net financial liabilities /(assets) |
|
|
(45.6) |
(118.7) |
35.4 |
20.6 |
Source: Company reports, Edison Investment Research
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Research: Healthcare
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